Friday Financial Foul Ups: The Fine Print of Rental Properties

This week’s Friday Financial Foul Up will feature a submission by Jesse from Personal Finance Firewall. On his blog, Jesse talks about his “burning” passion for personal finance and how he has bettered his financial life since January of 2009. Jesse can often be found on twitter (@pffirewall) as he has a ton of followers and a lot of influence in the tweeting community. I hope you enjoy his story about purchasing a rental property (BS: Something I may consider doing some day as a means to diversify).

Last year, I was given the opportunity to invest in a rental property. To me, this was a great opportunity. The information I was provided about the deal seemed solid, the company backing the deal seemed wise and trustworthy and I was very excited that I was able to participate. The opportunity did kind of fall into my lap though, and I didn’t want it to stress me out if I didn’t qualify so I took a somewhat lax approach to the whole process.

The Situation

Here are the details of the opportunity. A company in Florida would buy a group of foreclosed houses and sell them to large investment firms or wealthy individuals. Those investors tell the company, “I need 50 houses” so the company would by 50 foreclosed houses for the investors. Ever so often, an investor would come back and say, “I can only buy 45 of them” so the company would be stuck with 5 foreclosed houses they needed to unload. So they started selling these leftovers to little investors. Since they owned the houses and couldn’t buy more big groups of houses till they got the individual houses off their books, they offered incentives to the little investors to buy the houses.

The company buying the houses also ran a property management company so the deal was, as a little investor, I buy a single home in Florida (I live in Utah) and let the management company take over from there. The management company would do what a management company does, maintain and manage the home, keep tenants current, collect rent, etc. and I would sit back and let the dough roll in. The incentives offered were cash, particularly $5,000 upon closing and an additional $5,000 in an escrow account in my name to cover time when there was no tenant or any repairs to the home were needed.

Where I Fouled Up

I currently own my own home, but I am no Realtor and have a serious weak point for all the bank, property and contract mumbo jumbo that usually is dumped on you in this kind of transaction so instead of researching and asking a ton of questions, I just took my contacts word for everything and pretended I understood everything that was happening because like I said, I didn’t want to be stressed out over the deal. So I signed where I was told to sign, handed over all the information required and the deal actually went through. I was very excited! I also found out the home already had a renter, and everything was just peachy.

My mistake was that I didn’t fully understand everything. I didn’t know what the management companies fees were and I didn’t ever look to make sure the incentives were in the contracts I had signed. When the deal closed, the company gave me the $5,000 incentive cash but each time I asked about the escrow account with the other $5,000 in it, I was referred to a different individual that “handles that sort of thing”. Apparently, no one had a clue what I was talking about and there was never any escrow account with that cash set up for me. Then, when rent started to come in, some of it was missing! It turns out that was the management fee, 10% plus additional fees for new tenants and lease renewals.

What I Learned

Always read over things you are signing and ask as many questions as you can think of. Get outside opinions and never just take someone’s word for it when they are potentially on the recieving end of your money. It turns out these management fees are pretty reasonable compared to market standards, and the rental property has been a great asset but I still have negative feelings towards the transaction and the company when in reality if I had read the paperwork more thoroughly, I probably could have gotten the additional $5,000 in writing and negotiated for a lower management fee.

Friday Financial Foul Ups: The Fine Print of Rental Properties

This week’s Friday Financial Foul Up will feature a submission by Jesse from Personal Finance Firewall. On his blog, Jesse talks about his “burning” passion for personal finance and how he has bettered his financial life since January of 2009. Jesse can often be found on twitter (@pffirewall) as he has a ton of followers and a lot of influence in the tweeting community. I hope you enjoy his story about purchasing a rental property (BS: Something I may consider doing some day as a means to diversify).

Last year, I was given the opportunity to invest in a rental property. To me, this was a great opportunity. The information I was provided about the deal seemed solid, the company backing the deal seemed wise and trustworthy and I was very excited that I was able to participate. The opportunity did kind of fall into my lap though, and I didn’t want it to stress me out if I didn’t qualify so I took a somewhat lax approach to the whole process.

The Situation

Here are the details of the opportunity. A company in Florida would buy a group of foreclosed houses and sell them to large investment firms or wealthy individuals. Those investors tell the company, “I need 50 houses” so the company would by 50 foreclosed houses for the investors. Ever so often, an investor would come back and say, “I can only buy 45 of them” so the company would be stuck with 5 foreclosed houses they needed to unload. So they started selling these leftovers to little investors. Since they owned the houses and couldn’t buy more big groups of houses till they got the individual houses off their books, they offered incentives to the little investors to buy the houses.

The company buying the houses also ran a property management company so the deal was, as a little investor, I buy a single home in Florida (I live in Utah) and let the management company take over from there. The management company would do what a management company does, maintain and manage the home, keep tenants current, collect rent, etc. and I would sit back and let the dough roll in. The incentives offered were cash, particularly $5,000 upon closing and an additional $5,000 in an escrow account in my name to cover time when there was no tenant or any repairs to the home were needed.

Where I Fouled Up

I currently own my own home, but I am no Realtor and have a serious weak point for all the bank, property and contract mumbo jumbo that usually is dumped on you in this kind of transaction so instead of researching and asking a ton of questions, I just took my contacts word for everything and pretended I understood everything that was happening because like I said, I didn’t want to be stressed out over the deal. So I signed where I was told to sign, handed over all the information required and the deal actually went through. I was very excited! I also found out the home already had a renter, and everything was just peachy.

My mistake was that I didn’t fully understand everything. I didn’t know what the management companies fees were and I didn’t ever look to make sure the incentives were in the contracts I had signed. When the deal closed, the company gave me the $5,000 incentive cash but each time I asked about the escrow account with the other $5,000 in it, I was referred to a different individual that “handles that sort of thing”. Apparently, no one had a clue what I was talking about and there was never any escrow account with that cash set up for me. Then, when rent started to come in, some of it was missing! It turns out that was the management fee, 10% plus additional fees for new tenants and lease renewals.

What I Learned

Always read over things you are signing and ask as many questions as you can think of. Get outside opinions and never just take someone’s word for it when they are potentially on the recieving end of your money. It turns out these management fees are pretty reasonable compared to market standards, and the rental property has been a great asset but I still have negative feelings towards the transaction and the company when in reality if I had read the paperwork more thoroughly, I probably could have gotten the additional $5,000 in writing and negotiated for a lower management fee.